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All Employers, Including California Employers, Should Review their Compensation Practices for White Collar Employees

by Sharon Ongerth Rossi, Gayle M. Athanacio and Virginia K. Young
RJO Update: Labor and Employment
May 2016


All Employers, Including California Employers,
Should Review their Compensation Practices for White Collar Employees

By Virginia K. Young, Sharon O. Rossi and Gayle M. Athanacio

The Department of Labor (DOL) announced that on May 23, it will publish final regulations more than doubling the minimum salary required for employees to be exempt from federal overtime pay requirements under the Fair Labor Standards Act (FLSA). (As a refresher, employees who are not “exempt” must receive overtime pay at 1.5 times their regular rate of pay for all hours worked over 40 in a workweek. To qualify for a white collar exemption to this rule, employees must earn a minimum salary and perform certain specified duties.)

Key Provisions of the Updated FLSA Regulations

As a result of the updated regulations, beginning December 1, 2016, the minimum salary required for employees to satisfy the white collar exemptions under the FLSA (i.e., the executive, administrative and professional exemptions) will rise from $455/week ($23,660 per year) to $913/week ($47,476 per year). Employees who do not meet this minimum salary test cannot qualify for the white collar exemptions under federal law, regardless of the duties they perform, and must receive overtime pay. The DOL estimates that the new rule will result in over 4 million employees becoming eligible for overtime pay.

Notably, for the first time, the regulations will allow employers to provide up to 10% of the required minimum salary in the form of a non-discretionary bonuses and incentive payments (including commissions), provided that the payments are made at least quarterly. The FLSA “duties tests,” which requires that employees perform certain executive, administrative or professional duties to satisfy the exemption, will not change.

For employers who rely on the FLSA’s “highly compensated employee” (“HCE”) rule, which previously applied to employees earning more than $100,000 per year who met a relaxed duties test, the minimum compensation level will rise to $134,004/year, of which at least $47,476/year must be paid in salary. While non-discretionary bonuses or incentive payments cannot be used to meet the minimum $47,476 salary amount, employers can meet the $134,004 threshold above the minimum salary through incentive payments or other compensation.

Don’t Forget State Overtime Laws

As always, employers must comply with both the FLSA and any applicable state standards. Employers in California should be aware that the new FLSA salary level will exceed California’s current minimum salary requirement for white collar exemptions ($41,600 per year). Consequently, employees who currently meet California’s salary test for an exemption may not earn enough to meet the new FLSA salary requirement when the rule takes effect in December. Failure to meet the FLSA salary test would entitle employees to overtime for hours worked over 40 in a week. Employers should also keep in mind that California law does not have a parallel rule allowing employers to use bonuses and incentive payments to meet the minimum salary requirement, nor is there a “Highly Compensated Employee” rule under California law.

Don’t “Set It and Forget It”

The FLSA minimum salary will be updated every three years, and employers will need to keep apprised of these changes to ensure their employees meet the requirements for exemption. Employers must also monitor changes in state requirements. For example, California’s minimum salary for the white collar exemptions is twice the state’s minimum hourly wage, and rises automatically each time the state minimum wage goes up. As many California employers are aware, under Senate Bill 3, signed by California’s Governor Brown on April 4 of this year, the California state minimum hourly wage is set to increase on an annual basis over the next several years, unless temporarily suspended by the Governor.

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If you have any questions regarding the material in this update, please contact the Rogers Joseph O’Donnell attorney with whom you regularly work, or the authors of this legal update.

RJO’s Labor & Employment Law Practice Group is comprised of experienced labor and employment attorneys who regularly represent and advise employers, big and small, in a wide variety of industries.

The content of this article is intended to provide a general guide to the subject matter, and is not a substitute for legal advice in specific circumstances.

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